CKED PIC, PIC CREDIT, CV BOX TC Stewart Cummins

Stewart Cummins
doesn’t seek the limelight, but over the course of his career, choosing to do the right thing when others didn’t has meant he hasn’t been far from it. While he was financial controller at
Multiplex
in 2005, he revealed to the Australian Securities and Investments Commission losses on several projects amounting to hundreds of millions of dollars that hadn’t been disclosed to investors, including on the new Wembley Stadium.

The revelations led to the construction giant signing an enforceable undertaking with ASIC in 2006, which included a $32 million fund to compensate investors and a class action that finally concluded in a $110 million settlement in 2010.

The same lawyers who pursued the class action against Multiplex were chasing
Transpacific
for alleged breaches of continuous disclosure obligations when Cummins became CFO of Australia’s biggest waste management business in May 2011. As a result of his experience, he became chief negotiator, agreeing to an after-tax settlement of $35 million at the end of his first year. He reckons the fact the lawyers on the other side of the table knew his reputation as a whistleblower convinced them there was nothing more they could extract when negotiating the deal.

“I was the person who sat in the room with the other party late in the day after a very long and arduous mediation and stared them down," Cummins says. “There was an acceptance from the law firm and [litigation funder] IMF that we didn’t have any insurance protection, and there was an amount we could afford and that was it. They knew my character and reputation and believed what I had told them."

Quickly settling the class action was one of the vital first steps to the turnaround of a company that was groaning under the weight of almost $2 billion in debt following about 60 acquisitions before the financial crisis. Despite refinancing its loans and raising equity to bring debt down to $1.52 billion in October 2011, and ongoing divestments (particularly of its manufacturing divisions), debt is still a costly millstone around Transpacific’s neck, standing at just over $1 billion. The desperate situation in 2011 forced the company to accept fixed-interest rate hedges and loan establishment fees that will remain after the interest payments are reduced. Back then, debt was also a lot more expensive than it is now.

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The debt leads to volatile shareholder returns in a business that should have relatively steady, modest growth, says
JPMorgan
analyst
Russell Gill
. “Every 1-2 per cent change in EBITDA currently leads to around a 15 per cent change in EPS," he says. “Financial leverage is great if underlying earnings are growing but if EBITDA is flat or slightly negative, the downside to EPS can be significant."

Cummins says the company needs to achieve an investment grade status, if not an actual credit rating, which means an EBITDA-to-debt ratio of about 2:1, down from the company’s present 2.5:1. That will allow it to refinance its present debt, due between 2015 to 2017, at lower cost, and potentially lengthen its debt maturity.

Gill says the toughest task for Cummins is forcing cultural change, including getting procurement practices under control. Cummins mentions two other cultural factors: getting business managers to focus more on cash and working capital; and creating a mindset that will contribute to a better return on capital. “The single most important thing I will see on any given day is my cash report and cash forecast," he says.

A culture of honesty with investors, staff, customers and suppliers is crucial to identifying risks early, especially for any company in trouble. Cummins’s time at Multiplex, and what he saw from the outside when insurers HIH and FAI, and then their auditor Arthur Andersen, collapsed in the early 2000s, have left their mark (Cummins was an auditor of HIH and FAI during the 1990s when he worked at Arthur Andersen). “[Those experiences] taught me that honesty is the best policy and that it is better to tackle problems when they arise and not avoid them and hope they will go away, because typically they don’t," he says.

Transpacific’s fortunes are mostly tied to the non-mining sector of the economy. Amid tough conditions for customers, the company recovered from a statutory loss of $296 million in 2011 to a $12.5 million profit in 2012. But costs need to reduce and productivity improve to maintain profit growth. Two hundred staff were retrenched in the first half of the 2013 financial year, mostly from white-collar roles. Beyond the cuts, there are a host of practices Cummins describes as “startling", that need to be fixed. These include hundreds of reports being produced for senior management rather than dozens, and manual processes that can be automated, leading to tens of millions in savings.

Transpacific’s workforce has a strong union representation, so as they increase productivity Cummins’s negotiation skills will be tested to ensure that doesn’t lead to big pay rises as well. As well as balancing the sales of non-core businesses to pay off debt, Cummins and his team will focus investment on regions where it has the highest market share, or a good chance of achieving it.

Perhaps because of its dire straits combined with its capital intensive nature, Transpacific is a company led by CFOs. Former chairman Gene Tilbrook was the former finance director of Wesfarmers; CEO Kevin Campbell was previously finance chief; and the present chairman of the audit committee, Ray Smith, was a former finance boss at Smorgon Steel, now Bluescope. So is Cummins next in line to the throne? He will only say he is happy being CFO – for the moment.